Indian government pushes banks to go rural, but will it pay?

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Banks are currently losing money in most of their rural operations. (Reuters) Banks are currently losing money in most of their rural operations. (Reuters)
SummaryBanks are currently losing money in most of their rural operations.

Working out of a tiny rented room furnished with a wooden table, small biometric authentication machine and shelf stacked with passbooks, Ganesh Dangi is a one-man bank for a village of 650 people in northwestern India's desert state of Rajasthan.

A business correspondent, or local representative, for State Bank of Bikaner and Jaipur (SBBJ) in Ranchhodpura village, 40 km (25 miles) east of Udaipur city, Dangi is racing to sign up villagers to new "no frills" plans to meet a government target that every family in the district should have a bank account.

New Delhi plans to directly transfer cash payments for subsidies into these accounts, a move aimed at tackling graft in India's creaky, corruption-ridden public distribution system.

If successful, the initiative could also bring modern banking to the doorstep of rural India, a goal towards which progress has so far been fitful despite mandatory targets set by the government and Reserve Bank of India.

"Nearly 80 farmers in the village have taken crop loans. They have more confidence in banks now," says Dangi, who earns 1,500 rupees ($30) a month plus commissions. "They now know banks are not cheats to swallow up their money."

The target is a tough one in a country where only 35 percent of people had formal bank accounts, versus the global average of 50 percent, according to a financial inclusion survey by World Bank in 2011. Nearly two-thirds of India's 1.2 billion population still live in rural areas.

Currently being piloted in 20 districts, including three in Rajasthan, the programme is expected to go nationwide in phases over the next year.

The government plans to transfer 3.2 trillion rupees ($58 billion) to beneficiaries of its subsidy schemes and welfare programmes, according to newspaper reports.

It will pay the wages for more than 50 million workers in a rural job scheme, pensions for 20 million senior citizens and about 5 million education scholarships directly to bank accounts linked to a unique identification number.

It is also likely to free farmers from the clutches of money-lenders who charge annual interest of 24-50 percent, giving them access to institutional finance.

Shiva Kumar, managing director of SBBJ, a subsidiary of government-owned State Bank of India, says the initiative will bring "financial freedom" to India's vast rural hinterland, home to about 800 million people.

"Lot more money will come into the banking system. It can boost prosperity in the villages and that will get more business to banks," he

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